While public-sector jobs once offered greater job security but lower pay, this is no longer the case. A report from the Cato Institute indicates that in 2008 the average federal civilian salary with benefits was $119,982, compared with $59,909 for the average private sector worker. This disparity has grown greatly over the past decade so that workers in the public sector have both more job security & higher compensation that those in the private sector.

And it turns out that much of the various “stimulus” spending packages went to make public-sector jobs even more secure & more costly to taxpayers. It is no coincidence that the Obama administration & its allies count on support of various trade unions that represent workers in the government sector.

“If the government is to tell big business men how to run their business, then don’t you see that big business men have to get closer to the government even than they are now? Don’t you see that they must capture the government, in order not to be restrained too much by it? Must capture the government? They have already captured it.”
Woodrow Wilson (1913)

While economists credit George Stigler & Richard Posner with the concept of “regulatory capture” that explains how government agencies fail to serve the public interest, President Wilson made a clear statement of the problem much earlier.

The theory of regulatory capture is an answer to the question “who guards the guardians” is answered by the observation that the “gamekeeper turns poacher”. As an example of “regulatory failure”, it is one instance where government intervention leads to greater economic costs than benefits.

In particular, it describes an inherent tendency for regulatory agencies to be dominated by & act in the interests of the industries they regulate. The most vivid recent example is the coziness of Mineral Management Service of the US federal government with offshore oil-drillers like BP. As horrible as the consequences of the oil spills from the Deepwater Horizon might prove to be, its impact will be pale in comparison to monetary & environmental damage of government policies.

Much ire is being directed at BP or the oil-thirsty habits of US citizens & industry or indifferent regulators that might have been appointed by or employed by a particular political party.

However, it is a matter of incentives with both bureaucrats & politicians gaining personally from promoting the interests of powerful or rich individuals or industry groups. As such, political maneuvering allows pressure groups to divert resources that promote their own private interests.

One reason regulatory agencies act in the interests of the industries they regulate is that bureaucrats can leave government service & work for the firms they once had to oversee.

Included among the “dummies” that fail to grasp the complexity & dynamics of a market-based economy are about 95% of the economics profession & virtually all public-sector officials. As such, they believe that more government spending, even if financed by endless borrowing & even if used to support consumption, can “stimulate” real economic activity.

They are right in a banal & trivial sense that the conventional measure of economic activity includes government spending & assigns a disproportionate weight to consumption. Similarly, central bankers pumped in excess liquidity to push up commodity prices or to support business projects made momentarily viable due to artificially-low interest rates.

But an illusory recovery in the present of monetary & fiscal policies is more a cause for worry than for joy since the distortions that drive it will bring economic misery in the future..

Economic stimulus requires real & productive investments that lead to sustainable gains in productivity that lower average costs & rising real wages. Trying to float an economy on an ocean of red ink is like .

For the US economy to be revived in a meaningful way, rather than in an opportunistic political-spin sense, the financial system must be on a sound footing. & that requires removing the perverse incentives arising from government regulations & mandates that create “moral hazard” by encouraging inefficient behavior.

Officials in the Obama administration complain endlessly about banks having received bailout funds from TARP but making “too few” loans to individuals or companies.

But the financial system is operating on La-La-Land logic rather than commercial logic due to the monetary policy of the US Federal Reserve System & fiscal policies of the government.

As such, there are weak incentives for banks to lend to private-sector actor. In setting ridiculously-low interest rates on interbank borrowing, the Fed created the mother of all “carry trades”. & so banks borrow at near-zero short-term interest rates to buy longer-term government securities that pay higher rates with lower risks than lending to private-sector actors.

In all events, political hype is way ahead of the realities of economic fundamentals. This means that many of the new start-ups will be found to be unprofitable when variables like interest rates rise & government spending dries up.

It is hard to find evidence that the euro has generated more economic benefits than economic costs. Some suggest that the euro is forcing governments to behave more responsibly in trimming their budgets.

But the reality is that its creation created “moral hazard” conditions by reducing borrowing constraints on governments that encouraged out-of-control debt formation. As it was, membership in the euro-zone allowed governments overseeing weaker economies to run larger deficits financed with euro-bonds issued at relatively-low interest rates. Greece’s fiscal train wreck shows what happens when credit markets are lulled into underestimating sovereign risk.

Similarly, uniform interest rates across euro-zone countries led to an illusion of uniform risks so that capital was misallocated as seen in now-deflated property bubbles in Spain & Ireland.

Now European politicians want to “throw good money after bad” to bailout Greece & perhaps other southern European governments by trying to spook taxpayers into accepting higher burdens.

One fear tactic is to suggest that the departure of Greece or Spain from the euro-zone could lead to the disintegration of the European Union. But this ignores the fact that many EU member states do not participate in the currency union (e,g., UK, Sweden, Denmark & Poland).

Another scare tactic is that bailouts are necessary to avert sovereign debt defaults in Southern Europe that would unleash financial chaos & a wave of bank failures. However, the biggest risk is that euro-mess will lead to greater centralization of governmental reach & authority in Brussels with more intervention in the economies of Europe.

One element behind the collapse of the Roman Empire was wasteful spending on hedonist pleasures that crowded out more productive spending. For example, gladiators battled one another or fended off lions in gargantuan & wildly-expensive Coliseums.

Yet economists suspend reality & ignore lessons of history by advising governments that “multiplier” effects occur from staging World Cups or Olympics or building baseball stadiums. In the end, such lunacy passes for wisdom by rabid sports fans & spendthrift politicians at the expense of taxpayers.

When the US Congress increased the minimum wage in 2007, it removed an exemption from coverage granted historically to businesses operating on American Samoa. In so doing, the minimum wage for low-skilled Samoan workers was raised from $3.26 an hour to $5.25 today & that must increase to the current US minimum of $7.25 by 2015.

Unsurprisingly, these imposed hikes in labor costs had consequences. For example, Chicken of the Sea, one of the largest employers in the territory, closed tuna canning operations in September 2009 with more than 2,000job being eliminated. And another canner, StarKist, announced plans to lay off up to 800 workers to reduce its employment roll to 1,200 employees by 2011 from 3,000 before the minimum wage hike.

While minimum wage hikes do not explain all changes in the unemployment rate in American Samoa, it rose there from less than 10% in 2003 to about 30% with real incomes down by 6% from 2006 to 2008.

In turn, the US Congress is considering a grant worth $18 million to aid American Samoa to correct the problems that its previous actions caused.

The Virginia Declaration of Rights (1776) drafted & unanimously adopted by the Virginia Convention of Delegates identified inherent natural rights, including the right of rebellion against governments.

“That all men are by nature equally free & independent & have certain inherent rights, of which, when they enter into a state of society, they cannot, by any compact, deprive or divest their posterity; namely, the enjoyment of life & liberty, with the means of acquiring & possessing property & pursuing & obtaining happiness & safety.”

Judging from the ticket sales & long queues at amusement parks, many people lover roller-coaster & other thrilling

But such stomach-churning experiences are no fun when it comes to economic life. As such, you would think that public-sector officials would rigorously avoid them.

And they could do so if they followed a crucial invocation of economists relating to the importance of incentives, i.e., payoffs & punishments associated with rules & regulations.

It seems that the Obama Administration is tone deaf to the refrain that “incentives matter”. As it is, they seem incapable of understanding that expectations of heavier future tax burdens from excessive borrowing & spending will change people’s behavior.

Logic & history & theory suggest otherwise. Just as “cash for clunkers” induced people to buy sooner rather than later, expectations of higher tax burdens inspire a shift in investing, saving & spending to minimize long-term liabilities.

As such, looming increases in tax rates with the expiration of the Bush tax cuts will lead to front-loading of dividend payments, cashing out for capital gains & other such behavior that may boost results this year. However, that means that there will be even less activity next year when burdens on start-ups will be higher & penalties for success will be greater.